Tower Private Advisors
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Mohammed is the co-Chief Investment Officer at PIMCO. Like the title of this blog, he states that we’re living in interesting and consequential times.
He spent a fair amount of time rehashing the problems of Europe. He suggested that if you multiply its problems by a large number you get the world’s problems. Europe’s problems are:
1. Too little growth
2. Too much debt (in the wrong places, the weaker countries)
3. Too much economic dispersion (Spanish unemployment = 25%; Germany = 5.5%)
4. Lack of competitiveness
What follows is a stream of
consciousness disjointed, badly-taken notes.
He described the problems with Europe as an infection in one’s toe. While it might be contained, it affects the body, and, left untreated, could leave the body on the operating table.
Range of outcomes for Europe is morphing from a bell-shaped distribution to a Bactrian camel–the two-humped kind–shaped distribution. Think of it as as high probabilities surrounding two outcomes–or two bell shaped curves. The one outcome is Europe becoming stronger; the other, weaker. PIMCO’s view is that Europe “tips” stronger, but that if it tips to the weaker, it tips hard that way. A stronger Europe is either a re-founded Europe or a smaller Europe( i.e. 14-15 countries.) A weaker Europe is a lower–albeit not de minimus–probability, a probability of fragmentation. Either way it’s a bumpy ride.
We’re living in the midst of a global realignment, a time of many Monty-Python-like flesh wounds. It’s not a time to go all to cash, but it is a time to think differently. Investors need to be able to navigate the “great escape.”
PIMCO likes companies with:
1. Lots of cash
2. Low leverage
3. High operating margins
4. Exposure to growth markets
They do not like investing in broad markets unless the tail risk is hedged away.
PIMCO likes the countries that are the cleanest dirty shirts. If all your shirts are dirty you grab the cleanest one. Those countries are Germany (“it’s the AAA of AAAs”) and the U.S. for now.
His advice included getting rid of unconscious biases. He talked about a PIMCO session in which a video was shown of folks tossing a basketball around. While they were counting passes a gorilla walked through. Made to feel silly for missing the gorilla, the next time a similar video was shown, Mohammed was dialed in, looking for the gorilla. This time, he missed the child walking through with a red umbrella.
Lacy Hunt is the Chief Economist of Hoisington Investment Management. He’s got other credentilas, the essence of which are you need to listen to me.
He spent his time talking about the world’s debt problems, but particularly the U.S.’s. By his reckoning, our ratio of debt:GDP is 350%, and we’re headed toward Japan’s 450%. Since 2000, the U.S. has added 100% to the ratio, while real household incomes are no higher; we’re getting less and less bang for the buck (of leverage.) While the smart people said how fortunate we were to have a Depression expert–in Ben Bernanke–on the job in 2008. Lacy says we needed the expert in 2000, before the debt ramped up.
His solution is austerity. He gave no quarter in a question about whether the Keynesians were right in stimulating the economy in 2008. Well, he conceded that the economy had to be saved, but everything they’ve done since then has been harmful.
With respect to investing, he said that in past periods of overindebtedness, bonds outperformed stocks for 20 years, and he wouldn’t be surprised to see the 20-year period extend longer, given our extreme overindebtedness; therefore, he remains bullish on bonds.
David Rosenberg, Chief Economist and Strategist at the Canadian investment firm, Gluskin Sheff, was the day’s third speaker
He began by talking about his reputation as a perma-bear–at least with repect to equities. Instead, he said his biggest focus is always on risk, as in risk-adjusted returns, thus earning himself the perma-bear moniker. In determining his outlook he looks at the “market’s message.” For example, what does the 3-month Treasury bill’s yield indicate? A market fraught with risk. In contrast, the mid-teens yields of the early ’80s signaled that equity risks were very low. Indeed, he remains very bullish about bonds. He said income is in short supply, and one should own what’s scarce.
He presented a slide showing the factors most correlated with bond yields, and number one on the list was Federal Reserve monetary policy. Thus, with the Fed on hold–with respect to the Federal Funds Rate–he sees a bullish view on bonds as a natural outcome. In response to the argument that bond yields are [too] low, he asks, relative to what? Because relative to the Fed Funds Rate they’re quite high. He expects the long bond to go to 2%, in which case its total return would be 25%. He also likes corporate bonds, where a 5% default rate is priced in instead of the more realistic 2%, which is the current experience.
He isn’t surprised at all that investors continue to favor bonds over stocks, as measured by mutual fund flows. It’s all about demographics, namely the demographics of retiring baby boomers, who need income. They’ve gone from needing capital appreciation to needing capital preservation. With less than 7% of household assets in bonds, he sees room for that to move higher.
In short, his investment motto is safety and income at a reasonable price.