Michael Lipper takes on the 'new normal'
Following a visit to bond powerhouse PIMCO, the veteran investor looks at how equity investors can learn from the world of fixed income.
by Michael Lipper on Oct 29, 2012 at 09:24
Unpopular, Unconventional, Painful and Disruptive is not the name of the new hot law firm.
The title is a summation of some of my "out of the box" thinking flying home from a too-brief visit to an offsite board meeting of the California Institute of Technology and a visit to PIMCO, the world's largest bond manager.
"The New Normal"
One of the reasons bond managers think in terms of secular trends is that at times they invest, rather than trade, bonds with long maturities.
While those who buy stocks should be thinking in terms of long to infinite time periods, many of them focus on much shorter periods; e.g., quarters, twelve months, five or ten years - certainly not thirty years. That is why understanding bond managers is important to equity investors.
In meetings held by senior PIMCO investment people with a group of Caltech trustees, PIMCO focused on an expected period of prolonged very low interest rates.
They also shared their opinion that the various stimulus moves by leading central banks and governments will not lead to effective de-leveraging.
I got the distinct impression that these moves would prolong the valley of low employment and a decline in the developed world's standard of living, while many of the emerging countries enjoy rising standards of living.
A further examination for the sluggish response to the various government actions reveals that in the US, 71% of GDP comes from consumer spending with 47% of that total spent on services and only 24% on goods.
As services are time perishable, the old pump-priming techniques of the 1930s don't work as well.
If the present generalized approach is only going to prolong the problems, why not stop banging our heads against the stone wall and let the natural correction forces operate?
In other words, let rapid de-leveraging happen through a normal bankruptcy cycle. During bankruptcies, various contracts can be abrogated.
I would carry the process further by removing various constraints and restrictions in government policies that are no longer valid.
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