Bill Gross: Investment Outlook September 2009

Friday, September 4th, 2009

Bill Gross, co-chief at PIMCO, has just published his latest missive, On the “Course” to a New Normal.

You may listen to the newsletter in Bill Gross’ own voice here: Click play to listen:

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Gross asks, “Is a hole-in-one a hole-in-one if no one sees it?” He makes a humorous and interesting point. If no one witnesses your hole-in-one, its not a hole-in-one. On one hand, perhaps Gross’ point here is that economic policy makers need us to believe they’ve have hit a hole-in-one, and while many of us want to believe this, we’re still standing there with that funny look in our eye, like Gross’ wife, when he explained to her that he hit a hole-in-one, one hot June day, when he was out at the links by himself.

Or is it on the other hand, the hole-in-one was real, and though no one believes it, it is real, like the “new” normal.

For the better part of this year, Gross and El-Erian, his co-chief, have presented their “New Normal” thesis, suggesting that the world as we know it is changing, and that we need to re-tool for it. Will we change with the times, or be changed by them?

Gross says that the DDRs - Delevering, Deglobalization, and Reregulation - will be the new molds that shape our world over the next ten to twenty years.

“D,D, and R lead to a number of broken business or economic models that may forever change the world we once knew,” as follows

1. American-style capitalism and the making of paper instead of things. Inherent in the “great moderation” of the past 25 years was the acceptance of a sort of reverse mercantilism. America would consume, then print paper assets and debt in order to pay for it. Developing (and many developed) countries would make things, and accept America’s securities in return. This game is over, and unless developing countries (China, Brazil) step up and generate a consumer ethic of their own, the world will grow at a slower pace.
2. Private vs. public-driven growth. The invisible hand of free enterprise is being replaced by the visible fist of government, a temporarily necessary, but (if permanent) damnable condition itself in terms of future growth and profits. The once successful “shadow banking system” is being regulated and delevered. Perhaps a fabled “110-pound weakling” may be an exaggeration of where our financial system is headed, but rest assured it will not be looking like Charles Atlas anytime soon. Prepare to have sand kicked in your face, if you believe you are a “child of the bull market!”
3. Global economic leadership. It’s premature to award the 21st century to the Chinese as opposed to the United States, but if the last six months have been any example, China is sort of lookin’ like Muhammad Ali standing over Sonny Liston in 1964 yelling, “Get up, you big ugly bear!” Not only has China spent three times the amount of money (relative to GDP) to revive its economy, but it has managed to grow at a “near normal” 8% pace vs. our “big R” recessionary numbers. Its equity market, while volatile and lightly regulated, has almost doubled in twelve months, making ours look like that ugly bear instead of a raging bull.
4. United States housing and employment. Old normal housing models in the U.S. encouraged home ownership, eventually peaking at 69% of households as shown in Chart 1. Subsidized and tax-deductible mortgage interest rates as well as a “see no evil – speak no evil” regulatory response to government Agencies FNMA and FHLMC promoted a long-term housing boom and now a significant housing bust. Housing cannot lead us out of this big R recession no matter what the recent Case-Shiller home price numbers may suggest. The model has been broken if only because homeownership is declining, not rising, sinking to perhaps a New Normal level of 65% as opposed to 69% of American households.

Here are Gross’ conclusions:

As of now, PIMCO observes that the highest probabilities favor the following strategic conclusions:

1. Global policy rates will remain low for extended periods of time.
2. The extent and duration of quantitative easing, term financing and fiscal stimulation efforts are keys to future investment returns across a multitude of asset categories, both domestically and globally.
3. Investors should continue to anticipate and, if necessary, shake hands with government policies, utilizing leverage and/or guarantees to their benefit.
4. Asia and Asian-connected economies (Australia, Brazil) will dominate future global growth.
5. The dollar is vulnerable on a long-term basis.

Read the complete letter here.

Listen to it here, click play:

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Source: PIMCO, September 2009

Tags: American Capitalism, American Style, Bill Gross, capitalism, Ddrs, Developed Countries, Developing Countries, Economic Models, Economic Policy Makers, Ethic, Funny Look, Golfing, Gross Co, Gross Investment, Gross Point, Hole In One, Investment Outlook, Missive, Moderation, Molds, Paper Assets, PIMCO
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Bill Gross: From Feast to Fast - July 2009 Outlook

Friday, July 3rd, 2009

Bill Gross, the “Bond King” is going to great lengths to get us to understand that the world is in a state of reversion to what he and El-Erian, his co-chief at PIMCO coined as the “New Normal” 3 months ago, in his latest missive - “Bon” or “Non” Appétit?.

Our economy which once feasted, no, binged, unable to stop itself, on debt and leverage, and on the basis that home and other asset prices would rise to the sky, is now fasting, cleansing itself of the fat that accumulated, and it is a long-term process that will take many years to complete.

Click Play to Listen to Bill Gross’ Investment Outlook:

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Here are some of the highlights from the letter, which you may download here:

Gross re-iterates the “New Normal” - Its starting to sound a lot like “The Emperor’s New Clothes“:

Our economy’s lights, if not switched off in a rehash of the 1930s Depression, have certainly been dimmed in a 21st century version likely to be labeled the Great Recession. Much like John McSherry, U.S. and many global consumers gorged themselves on Big Macs of all varieties: burgers to be sure, but also McHouses, McHummers, and McFlatscreens, all financed with excessive amounts of McCredit created under the mistaken assumption that the asset prices securitizing them could never go down. What a colossal McStake that turned out to be. Now, however, with financial markets seemingly calmed and an inventory-based recovery in store for the balance of 2009, there is a developing optimism that we can go back to the lifestyle of yesteryear. PIMCO’s driving thesis however, if not a juxtaposition, is succinctly described as a “new normal” where growth is slower, profit margins are narrower, and asset returns are smaller than in decades past based upon the delevering and reregulating of the global economy, which in turn should substantially inhibit the “gorging” of goods and services that we grew used to in decades past.

Forecasts based on econometric models inevitably miss these secular/structural breaks in historical patterns because it is impossible to quantify human behavior, and long-term trends involving risk-taking and in turn derisking are decidedly human in their origin. Bell-shaped curves with Gaussian/random distributions fail to anticipate that human beings do not make decisions by chance or independently of each other, but in many cases in reaction to one another. Humanity’s personal and social computers appear to be programmed that way. And so, instead of “normal” distributions, economists and investors must learn to be on the lookout for “black swans,” and if not, then certainly “fat tails,” which differ from the measurement of natural phenomena accepted in science. “New normals,” flatter-shaped bell curves, and structural shifts in previously accepted standards become not only possible, but probable as human nature reacts to itself and its prior behavior. The efficient market hypothesis was always dead from the get-go, but academic tenure and Nobel prizes were food for the unwilling or perhaps unthinking.

Others are starting to wonder about the emperors new clothes, the “green shoots”:

I was impressed this weekend by an article in the Op-Ed section of The New York Times by staff writer Bob Herbert. “No Recovery in Sight” was the heading and his opening sentence asked, “How do you put together a consumer economy that works when the consumers are out of work?” That is really all one needs to ask when divining our economy’s future fortune. Unless an optimist can prescribe how to put Humpty Dumpty back together again and shuffle him/her back to work then there can be no return to an “old normal.” As unemployment approaches 10%, what is less well publicized is that the number of “underutilized” workers in the U.S. has increased dramatically from 15 to 30 million. Those without jobs, as well as those individuals who only work part-time and have become discouraged and stopped looking, total 30 MILLION people. The number is staggering. Commonsensically, one has to know that many or most of these are untrained for the demands of a green-oriented, goods-producing future economy. Imagine a welding rod in the hands of an investment banker or mortgage broker and you’ll understand the implications quicker than any economist using an econometric model.

Fifteen Words to describe the era that led us to our current economic crisis:

The supersizing of financial leverage and consumer spending in concert with the politicizing of deregulation describes in fifteen words our most recent brush with irrational behavior and inefficient markets. Greed will come again. But for now, the trend is the other way and it promises to persist for a generation at a minimum. The fact is that American consumers have suffered a collapse in wealth of at least $15 trillion since early 2007. Global estimates are less reliable, but certainly in multiples of that figure. And when potential spenders feel less rich by that much, the only model one can use to forecast the future is a commonsensical one that predicts higher savings, lower consumption, and an economic growth rate that staggers forward at a new normal closer to 2 as opposed to 3½%. There’s no magic in that number, and no model to back it up, just a lot of commonsense that says this is how people and economic societies behave when stressed and stretched to a near breaking point.

Where do we go from here:

Investors who stuffed themselves on a constant diet of asset appreciation for the past quarter-century will now be enclosed in a cage featuring government-mandated, consumer-oriented fasting. “Non Appétit,” not Bon Appétit, will become the apt description for the American consumer, and significant parts of the global economy, including the U.S. Because this is so, short-term policy rates will be kept low for longer than cyclical norms, and the outlook for risk assets - stocks, high yield bonds, and commercial and residential real estate will involve just that - risk. Investors should stress secure income offered by bonds and stable dividend-paying equities. Consumer Cuisinart consumption is a relic of the past.

Tags: Asset Prices, Asset Returns, Bill Gross, Burgers, Econometric Models, Excessive Amounts, Financial Markets, Global Consumers, Global Economy, Great Lengths, Gross Investment, Investment Outlook, John Mcsherry, Juxtaposition, Missive, Mistaken Assumption, PIMCO, Profit Margins, Recession, Reversion, Yesteryear
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James Montier: Sucker Rally or Real Deal? Buy Insurance

Friday, May 8th, 2009

The debate rages on: Is this a sucker rally or a new bull market? James Montier, the highly respected co-chief strategist at SocGen has weighed in on the subject in his latest letter. Montier says he’s buying portfolio insurance.

Paul Murphy from FT.com discusses James Montier’s latest Mind Matters, investment newsletter, A suckers’ rally or the real deal?

The question is on quite a few lips right now. The Footsie is up 25 per cent in the space of two months, as has S&P 500 has risen some 34 per cent from its March 9 low.

James Montier at SocGen says he doesn’t have a clue. So he’s buying insurance - to protect on the downside. From the strategist’s latest Mind Matters missive to clients:
This strategy paid dividends in Japan which was characterised by explosive rallies (driven by the economic recovery) and the horrifying slumps as the recovery failed. Two methods of insurance stand out. Either I could buy index puts (relatively cheap at the moment) or I could construct individual short positions. In the past I’ve argued that the perfect short candidate is overvalued, with deteriorating fundamentals, poor capital discipline and poor accounting. Running my screen to find such names reveals candidates such as Anheuser-Busch InBev, Ericsson, Cairn Energy, and Staples.

Montier’s point is that he needs to “off-set ignorance” - and his Eastern experience teaches that a portfolio of shorts offers the best hedge. A value oriented long/short strategy for Japan has generated a return of 12 per cent per annum over the last two decades in Japan, against a market that was contracting  at a yearly rate of 4 per cent. A long-only value strategy for Japan generated a 3 per cent return - indicating that the the Japanese market’s under-performance was largely down to the appalling performance of supposed “glamour stocks,” which lost 8.5 per cent per annum over the past 20 years.

So, what to sell…Montier reckons there are four traits to the perfect short: overvaluation, deteriorating fundamentals, poor capital discipline and bad accounting.

Here, in two parts, is his full filtered list:

This is by no means advice, however, for those who are concerned about protecting their portfolios, there are a couple a different ways to do this.

One way investors can buy insurance is via the options market to get downside protection against individual positions or secular index or sectoral positions.

In addition, for those who don’t have the stomach to take short positions in the traditional way, inverse ETFs, like those made available through Horizons Betapro (Canada), Proshares, or Direxions, for example, may be an effective way to seek out some ‘downside’ protection, or to make secular, or sectoral directional bets, on a short term basis.

Tags: Anheuser Busch, Buy Insurance, Buying Insurance, Cairn Energy, Canada, Chief Strategist, Debate Rages, Economic Recovery, ETF, Footsie, Glamour Stocks, Inbev, Investment Newsletter, James Montier, Japanese Market, Mind Matters, Missive, Portfolio Insurance, Slumps, SocGen, Staples, Value Strategy
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