Summary
• The New Normal, previously believed to be bell-shaped and thin-tailed in its depiction of growth probability and financial market outcomes, appears to be morphing into a world of fat-tailed, almost bimodal outcomes.
• A new duality – credit and zero-bound interest rate risk – characterizes the financial markets of 2012, offering the fat left-tailed possibility of unforeseen policy delevering or the fat right-tailed possibility of central bank inflationary expansion.
• Until the outcome becomes clear, investors should consider ways to hedge their bets, including: maximizing durations, U.S. Treasury bonds that may potentially offer capital gains, long-term Treasury Inflation Protected Securities (TIPS), high quality corporates and senior bank debt, and select U.S. municipal bonds.
Read the whole letter at PIMCO
by Bill Gross
"The New Normal, previously believed to be bell-shaped and thin-tailed in its depiction of growth probability and financial market outcomes, appears to be morphing into a world of fat-tailed, almost bimodal outcomes."
ReplyDelete....Whaaaaaaaaatttt?
He's losing it big time.
ReplyDelete"It's as if the earth now has two moons instead of one and both are growing in size like a cancerous tumor that may threaten the financial tides, oceans and economic life as we have known it for the past half century."-Bill Gross.
Two moons?
Cancerous tumors??
Life as we know it???
He's really lost it!
Well, he did say "paranormal."
ReplyDelete"Bimodal" means, "I don' t know wtf is going on." :)
I guess you have to try to make things appear to be more "spooky" or complicated or in-understandable in order to get people to keep sending you money to manage in UST Funds when risk free rates out to six months are effectively negative....
ReplyDeleteBimodal - in one of two states, but not in any other state?
ReplyDeleteProbably the most insightful section of Gross's letter was this part:
ReplyDeleteWhen I was here, I wanted to be there; when I was there, all I could think of was getting back into the jungle. I'm here a week now … waiting for a mission … getting softer; every minute I stay in this room, I get weaker, and every minute Charlie squats in the bush, he gets stronger. Each time I looked around, the walls moved in a little tighter.
Oh wait, that was Martin Sheen's character in Apocalypse Now. Sorry, carry on.
http://en.wikiquote.org/wiki/Apocalypse_Now
Like it beowolf, very funny
ReplyDeleteReading that monthly (I used to read it monthly, but gave up on it a few years back), I started to wonder whether he's simply been enormously lucky all these years! Him questioning 'the effectiveness of historical conceptual models' and whether they (low yields) might be hazardous to an economy's health' are preposterous for a supposed expert. He should know the nuts and bolts like the back of his downward dog. This is just outrageous.
He keeps banging on about QE's keeping growth afloat and recommending TIPs on the basis of future inflation because of it. I mean, really! And then he goes immediately on to talk about how flat yield curves are. Just one of the each way bets in this ode to waffle. Asked yourself why curves are so flat, Bill? Or why QE has proven to be anything but inflationary, despite the effort? The inability of faux financial system luminaries such as yourself to actually understand the monetary system is an important part of the problem. I didn't see QE doing a whole lot, but did see fiscal policy steering the economy away from one of hi porky tail outcomes!
he is right to say that capitalism doesn't work well with flat curves, but it also doesn't do well without proper road rules and safeguards, something that was glaringly missing up to 2007 (and in his essay) as the financial system was allowed to run free for the most part. The historical concept of what capitalism actually is should be under debate. The accepted supply side wisdom should have produced a boom by now with rates so low. After all, it's the private sector that is the generator of all good outcomes along with that supply creating it's own demand malarkey, right? Right? Well I'm still waiting for that private sector stimulus ... Or could it be that producers respond to the obvious signals given to them by demand. Goodness, could it be?
And oh, I had to agree at least with his final sentence ... The financial markets and global economy are indeed at great risk
ReplyDeleteApj