PIMCO's Bill Gross Favors Quality Credit Spread Over Duration Extension (April 2010 Commentary)

Today we wanted to highlight the latest investment outlook from PIMCO's bond vigilante himself, Bill Gross. In his past March commentary, Gross focused on corporate versus sovereign bonds. His April commentary is entitled 'Rocking-Horse Winner' and it centers on American capitalism and how it is driven by printing, lending and borrowing money in order to make more money. Gross immediately notes that we face an environment with lower growth due to headwinds in deleveraging, deglobalization, and reregulation. Gross of course recently landed on Forbes' billionaire list, joining many prestigious investment managers.

The crux of Gross' message this time around comes later in his insight where he writes,

"The reason is complicated, but at its core very simple. As a November IMF staff position note aptly pointed out, high fiscal deficits and higher outstanding debt lead to higher real interest rates and ultimately higher inflation, both trends which are bond market unfriendly. In the U.S. in addition to the 10% of GDP deficits and a growing stock of outstanding debt, an investor must be concerned with future unfunded entitlement commitments which portfolio managers almost always neglect, viewing them as so far off in the future that they don’t matter. Yet should it concern an investor in 30-year Treasuries that the Congressional Budget Office estimates that the present value of unfunded future social insurance expenditures (Social Security and Medicare primarily) was $46 trillion as of 2009, a sum four times its current outstanding debt? Of course it should, and that may be a primary reason why 30-year bonds yield 4.6% whereas 2-year debt with the same guarantee yields less than 1%. The trend promises to get worse, not better."

Elaborating further on his thoughts, it's clear that Gross favors quality credit spread over duration. He argues that investment strategies should start to position themselves on the front-end of various yield curves that are subject to successful reflation. He specifically highlights the US and Brazil here. He also recommends positioning on the long end of curves that can survive debt deflation (namely Germany and most of the solid European nations).

Lastly, Bill Gross notes that, "Spreads in appropriate sovereign and corporate credits are a better bet as long as global contagion is contained. If not, a rush to the safety of Treasury Bills lies ahead." You can directly download Bill Gross' entire April 2010 investment outlook via .pdf here.

Interesting thoughts as always from PIMCO's bond vigilante and we'll continue to check in with him each month. You can also check out his March commentary as well as our compilation of investment insight from various gurus.

Jim Rogers Starts Some Short Positions

Legendary investor Jim Rogers recently appeared on television and voiced some of his latest opinions and investment maneuvers. We haven't talked about the former Quantum Fund manager for a while because, let's face it, he's on television all the damn time. But, some of his comments from this recent interview made us take notice.

Potentially the most notable bit of his conversation was when he said, "I had no shorts for about 15 months so I started putting out some shorts recently. But the fact that I've been putting out shorts means the stock market won't pull back." So, it's interesting to see Rogers fight the current trend. In his mind, it's the right play, but he knows he's going to potentially feel some pain first. Many investors out there will agree that the market is overdue for a near-term pullback. MarketClub voiced these concerns in their recent technical analysis video of the S&P 500. Additionally, Bespoke outlined that many stocks are overbought.

We've also noticed some other signs that the market might be getting overheated for now. If you hadn't realized yet, there's been an insane amount of secondary offerings hitting the market. As we tweeted earlier, these secondaries typically come in droves when there is complacency and it could be a contrarian signal. (You can follow us on Twitter here). It's been noted many times in the past that investors often buy the most at the top. Where were all these secondaries when the market was tanking and stocks were cheap? There was no demand; investors were too scared. Now that everyone feels 'safe' again, the secondaries are rolled out, the buybacks crank up, and the insiders start purchasing. So, you can't really blame Rogers for taking a stab here even though he's going against the current trend.

In his interview, Jim Rogers also talked about some other hot topics. He touched on the euro given the fact that European sovereign defaults have taken centerstage. Rogers notes that, "The euro will probably break up in the next 15 to 20 years. Don't get me wrong, I own the euro. We've had currency unions in history. They didn't survive. This one won't survive either." So, he's short-term bullish and long-term bearish on the euro.

He then shifted his focus to how potential sovereign defaults could have ramifications for the currency. Rogers said that, "If the euro zone helps the Greeks, that weakens the fundamentals of the euro. As the next government comes to demand concessions, they weaken the currency from within. I would let Greece go bankrupt because then everybody will say the euro is a serious currency." This stance of his is by no means new. He's a staunch supporter of the notion that markets should work things out on their own, even if it means something will fail. So, it's always intriguing to hear what Rogers has to say.

In the end, everyone knows market timing is a bitch. While Jim Rogers obviously isn't suggesting you go net short, it makes perfect sense to us to put on some hedges, take some profits on longs, and to identify companies that are now looking too frothy. And, it sounds as if that's just what Rogers is doing. Whitney Tilson of hedge fund T2 Partners has been doing the same. Lee Ainslie of hedge fund Maverick Capital said in his investor letter that he thinks 2010 will be a return to a stockpicker's market. He makes a great point that the decline in the price of risk equals opportunity for shorts.

Here's the video of one of Rogers' recent television interviews:



In financial markets, you can never be too cautious. After all, it usually hurts more to be reactive rather than proactive. We just wanted to highlight Rogers' new application of short positions since he's previously been long for many months. It's been a while since we last covered the legendary investor in detail, but those looking for more of his wisdom can head to our ancient post on Rogers' portfolio and an interview with his thoughts on commodities.

PIMCO's Bill Gross On Corporate Versus Sovereign Bonds: March Commentary

Bill Gross is out with his latest commentary from PIMCO. In his March 2010 investment outlook entitled 'Don't Care', Gross focuses on the lack of global aggregate demand and how we got into this whole situation. The first part of his commentary doesn't really focus on markets, but rather on social situations. It is still comical (and shockingly somewhat true) and eventually ties into his market discussion, providing a decent analogy. Previously, we've also posted Gross' previous outlook as well as his thoughts on why the market is up so much from the lows.

Given Gross' natural focus on all things fixed income, he comments on how sovereign bonds have been hit hard and as of late have even been surrounded with more negativity than corporate debt. With the recent wave of default concern, it's intriguing that the roles of these types of bonds have flipped. Previously, sovereign bonds were considered safer than corporates. Nowadays, investors are re-considering and some corporates now look safer than some sovereigns. In terms of recommendations, he likes strong sovereign bonds including Germany and Canada.

Gross writes,

"It is interesting to observe that over the past few months when investors have begun to question the ability of governments to exit the debt crisis by “creating more debt,” that increases in bond market yields have been confined almost exclusively to Treasury/Gilt-type securities, and long maturities at that. There has even been a developing debate in the press (and here at PIMCO) as to whether a highly-rated corporation could ever consistently trade at lower yields compared to its home country’s debt. I suspect not, but the narrowing in spreads since late November solicits an interesting proposition: Government bailouts and guarantees such as those evidenced and envisioned in Dubai and Greece, as well as those for the last 18 months with banks and large industrial corporations across the globe, suggest a more homogeneous “unicredit” type of bond market. If core sovereigns such as the U.S., Germany, U.K., and Japan “absorb” more and more credit risk, then the credit spreads and yields of these sovereigns should look more and more like the markets that they guarantee. The Kings, in other words, in the process of increasingly shedding their clothes, begin to look more and more like their subjects. Kings and serfs begin to share the same castle.

This metaphor doesn’t really answer the critical question of whether a debt crisis can be cured by issuing more debt. The answer remains: It depends – on initial debt levels and whether or not private economies can be reinvigorated. But it does suggest the likely direction of sovereign yields IF global policymakers are successful with their rescue efforts: Sovereign yields will narrow in spreads compared to other high-quality alternatives. In other words, sovereign yields will become more credit like. When sovereign issues become more credit-like, as evidenced in Greece, Spain, Portugal, and a host of others, they move closer in yield to the corporate and Agency debt that supposedly rank lower in the hierarchy. That process of course can be accomplished in two ways: high-quality non-sovereigns move down to lower levels or governments move up. The answer to which one depends significantly on future inflation, the aftermath of quantitative easing programs, and the vigor of the private economy going forward. But the contamination of sovereign credit space with past and future bailouts is a leveler, a homogenizer, a negative for those sovereigns that fail to exert necessary discipline. Only if global economies stumble and revisit the recessionary depths of a year ago should the process reverse direction and place Treasuries, Gilts, et al. back in the driver’s seat."


To read the rest of Bill Gross' commentary, directly download it via .pdf here.

For more investment insight from market gurus, check out Warren Buffett's annual letter as well as Eddie Lampert's annual letter. Additionally, make sure to check out our past coverage of a ton of very insightful commentary from hedge funds.

Bill Gross' Market Outlook February 2010 (PIMCO)

Next up, we have Bill Gross' February 2010 market outlook. Today is 'wisdom Wednesday' (pardon the lame name) here at Market Folly as we have plenty of interesting reads to share with you and earlier posted Bill Gates' 2010 annual letter. Moving on, Bill Gross of course is PIMCO's bond vigilante and in the past we had covered his thoughts on why the market is up so much from the lows.

His latest commentary entitled, "The Ring of Fire" focuses on how investors should invest in 'less levered countries'. In terms of identifying such countries, Gross says to look for a growing consumer sector, low national debt levels, a savings oriented economy, and high reserves. He advises investors to find countries like Brazil and China, but ones that are less bubble-prone. Specifically, he points out to avoid the UK as their high debt coupled with possible currency devaluation presents high risk. Among countries that are already developed, Gross favors Canada and Germany. His latest piece comes after his January commentary where he examined the Federal Reserve's exit strategy.

Embedded below you'll find the February 2010 market outlook from PIMCO's bond bandit Bill Gross:




Also, you can download the .pdf here.

For more insight, check out Bill Gross' January commentary, as well as his thoughts on how he was betting on deflation.

PIMCO's Bill Gross: Investment Outlook (October 2009)

Here's the latest from Mr. Bond a.k.a. Bill Gross of PIMCO. His October market commentary is interestingly enough entitled, 'Doo-Doo Economics.' We recently learned that Gross was swapping out of corporates and buying long-term treasuries. He now leans toward the deflation side, at least for now, in the ongoing debate of inflation versus deflation. We have also previously posted up his September commentary and his insight shifts this month to the ongoing problems in California and you can read the latest edition of his Investment Outlook commentary below, courtesy of PIMCO:

"

The world is turning “green” – global warming or not. Electric cars, free-range chickens, and White House vegetable gardens are the wave of the future, but the defining badge of environmentalists may be none of those and might, in fact, be colored blue, as opposed to green. Dog owners would be the first to acknowledge it. Having converted reluctantly to felines nearly ten years ago, I myself am only forced to humble myself by emptying the litter box once or twice a year when Sue is visiting the relatives. But dogs? Well, Bowser has to be walked, and Bowser owners these days are being forced to subserviently follow in step, holding those little blue “doo-doo” bags at the ready that keep the neighbors’ grass green instead of brown and minimize the number of summer flies to a billion per square mile. No longer will the current generation be allowed to use pooper-scoopers; they must in fact be pooper “stoopers,” bending down, turning the bag inside out to form a glove, and then – EEECH – making the grass environmentally friendly again by picking it up, reversing the bag and hurriedly looking for the nearest neighbor’s garbage can who might conveniently be at church or shopping at the grocery store. One can only hope that Fido is mildly constipated, if you get my drift. I can recall the diaper days with my three kids. It wasn’t a pleasant experience, but those non-environmentally friendly Pampers at least afforded one-stop dropping – easy on, easy off – no touchy, no feely. In those days, a doggie bag was something you asked for in a fine restaurant to take home the steak bones. Now it’s a blue plastic reminder that the world is changing and in many respects our daily routine is becoming a dog’s life.

A similar metaphor could be applied to the 45 million citizens of the State of California. Once “golden” and the land of entrepreneurial opportunity, the state has turned from filet mignon to ground chuck and its residents are now on a short leash as opposed to masters of their own universe. Unemployment at 12.2% is near the nation’s highest and its Baa bond rating is the country’s lowest. Its schools are abysmal, competing with Louisiana and Mississippi for the lowest rating in the federal government’s National Assessment of Educational Progress. While the air is much cleaner than it was 20 years ago, the freeways are stereotypically jammed and increasingly less free – the age of the toll road serving the exasperated (or simply the Mercedes owners) is upon us.

Our canine existence has many fathers. Perhaps more than any other state, California has been affected by its perverted form of government, requiring a two-thirds vote by state legislators to effectively pass a budget. In addition, the state’s laws are almost tragically shaped by a form of direct democracy more resemblant of the Jacksonian era, where the White House furniture was constantly at risk due to unruly citizens, high on whisky, and low on morals and common sense. Propositions from conservatives and liberals alike have locked up much of the budget, with Proposition 13 in 1978 reducing property taxes by 57% and Prop. 98 in 1988 requiring 40% of the general fund to be spent on schools. Recently, much of any excess has been gobbled not only by teachers, but unbelievably by a prison lobby that would be the envy of any on Washington’s K Street.

The result has been a $26 billion deficit that was supposedly “closed” in recent weeks, but which largely was a “kick the can” accounting scheme that postponed the pain, or better yet, pled for a federal solution to self-inflicted wounds. State budgets of course are required to be balanced each year, but that has long been a fiction throughout most of the country. Still, California’s 2009 fix was perhaps the longest kick of the can in history, refusing effectively to raise taxes, superficially cutting expenses, and shaming its fading image by refusing to disburse required billions to local counties and communities, as well as using accounting tricks that couldn’t fool a grade-schooler. In the process, they managed to reinvent the IOU, paying bills in virtual scrip that then traded at substantial discounts on eBay of all places. They have issued tax anticipation notes of all sorts with a multitude of lettered configurations that anagram aficionados would revel in. Just last week the state extended its begging bowl for $8 billion of “RANs” (Revenue Anticipation Notes) at an onerous money market rate of 1 1⁄2%. Previously they had issued “RAWs” (Revenue Anticipation Warrants). “BAGs” might be next – blue BAGS, that is, full of the doo-doo that California citizens have grown used to picking up.

There are signs that California voters are ready to make some tough choices, having recently refused to pass five propositions that would have extended tax hikes and failed to address spending. Whether or not Governor Schwarzenegger and legislators will agree to a constitutional convention to address the poisonous proposition plebiscite itself is a larger question that will likely be affirmatively answered only if the state economy continues to remain in the tank, which it likely will. But California’s problems, while somewhat unique and self-inflicted, are really America’s problems, and not just because the California economy is 15% of national GDP. While California’s $26 billion deficit is not directly comparable to the federal gap of $1 trillion-plus, they both reflect a lack of discipline and indeed vision to perceive that the strong growth in revenues was driven by the same excess leverage and the same delusionary asset appreciation that was bound to approach cliff’s edge. California’s property taxes, income taxes, and sales taxes were all artificially elevated by national and indeed global imbalances as the U.S. manufactured paper, and Asia manufactured things in mercantilistic exchange. Total tax revenues have actually fallen 14% over the past 12 months in California and substantially more in other states. At some point, that Fantasyland merry-go-round had to stop and whether the defining moment was marked by Bear Stearns, Lehman Brothers, or the tumultuous week that followed in September of 2008 is really not the point.

What is critical to recognize is that both California and the U.S., as well as numerous global lookalikes such as the U.K., Spain, and Eastern European invalids, are in a poor position to compete in a global economy where capitalism is morphing from its decades-long emphasis on finance and levered risk taking to a more conservative, regulated, production-oriented system advantaged by countries focusing on thrift and deferred gratification. The term “capitalism” itself speaks to “capital” – the accumulation of it and the eventual efficient employment of it – for growth in profits and real wages alike.

What California once had and is losing rapidly is its “capital”: unquestionably in its ongoing double-digit billion dollar deficits, but also in its crown jewel educational system that led to Silicon Valley miracles such as Hewlett Packard, Apple, Google, and countless other new age innovators. In addition, its human capital is beginning to exit as more people move out of the state than in. While the United States as a whole has yet to suffer that emigration indignity, the same cannot be said for foreign-born and U.S.-educated scientists and engineers who now choose to return to their homelands to seek opportunity. Lady Liberty’s extended hand offering sanctuary to other nations’ “tired, poor and huddled masses” may be limited to just that. The invigorated wind up elsewhere.

Now that our financial system has been stabilized, one wonders whether California’s “Governator” and indeed the Obama Administration has the capital, the vision, and indeed the discipline of its citizenry to turn things around. Our future doggie bags can hold steak bones or doo-doo of an increasingly familiar smell. For now investors should be holding their noses, their risk orientation, as well as their blue bags, until proven otherwise. Specifically that continues to dictate a focus on high quality bonds and steady dividend paying stocks that can survive, if not thrive, in our journey to a “new normal” economy of slower growth, muted profit gains, and potential capital destruction via default, abrogation of property rights, and dollar devaluation.

William H. Gross
Managing Director

"

For thoughts from Bill more-so related to the markets, check out our latest post on him that details how he's betting on deflation.

PIMCO's Bill Gross Investment Outlook: August 2009

Some of you may have already read the latest from PIMCO's Bill Gross. But if you haven't, then here's the August 2009 commentary from the bond-trooper himself, entitled 'Investment Potions,' which can be found on PIMCO's website.


"

I took my troubles down to Madame Rue
You know that gypsy with the gold-capped tooth
She’s got a pad down on 34th and Vine
Sellin’ little bottles of – Love Potion #9
– Love Potion #9, Circa 1959

I’ve never known any gold-capped tooth money managers, but without squinting very hard there is undoubtedly a strong resemblance between all of us “managers” and the infamous Madame Rue selling Potion #9. Instead of love, though, we sell “hope,” but very few are able to seal the deal with performance anywhere close to compensating for the generous fees we command. Hope has a legitimate price, of course, even if its promises are never fulfilled. It is the reason we put a five spot into the collection plate on Sunday mornings and why we risk a 25-dollar chip at the blackjack table. In the former case we usually rationalize it as “insurance,” and with the latter as “entertainment.” Whatever – I’ve already alienated all of you with strong faith in the hereafter or the ones who actually believe they’re going to win on their next trip to Las Vegas. But my point is that those who sell investment “potions” must wrap their product with an extra large ribbon because history is not on their side. Common sense would dictate that the industry as a whole cannot outperform the market because they are the market, and long-term statistics revealing negative alpha for the class of active managers confirms it. Yet, what a price investors are willing to pay! A recent Barron’s article pointed out that stock funds extract an average 99 basis points or virtually 1% a year in fees from an investor’s portfolio. Bond managers are more benevolent (or less pretentious) at 75 basis points, and many money market funds manage to subsist at a miserly 38. Still, those 38 basis points are as deceptive as the pea that disappears beneath the shell of a street-side con game. Since money market funds barely earn 38 basis points these days, much of the return winds up in the hands of investment managers. A mighty expensive potion indeed. While some index and ETF proponents avoid this extreme absurdity with lower fees, roughly 90% of the $1.5 trillion in 401(k) and other defined contribution assets in mutual funds are in actively managed offerings with expenses close to 1%. Paying for those potions during an era of asset appreciation with double-digit returns may have been tolerable, but if investment returns gravitate close to 6% as envisaged in PIMCO’s “new normal,” then 15% of your income will be extracted based on the beguiling promise of Madame Rue. The solution, of course, is to compare long-term performance with fees and approach 34th & Vine with informed confidence, as opposed to Pollyannaish hope that you’ll get your money’s worth. Down the hatch and good luck!

Investors looking for love potions or successful investment strategies in this new normal economy dominated by deleveraging and reregulation must focus on some very macro-oriented ingredients as opposed to typical news-dominated minutiae. The latest quarterly earnings report from Goldman Sachs may be an indicator that the financial sector is getting some color in its cheeks, but it doesn’t really let you know what needs to happen in order for the real economy to stabilize as well. My last month’s Investment Outlook commentary on the significance of wage and employment trends remains the key focus. Common sense tells us that consumer spending growth comes from highly employed, well-compensated labor, and we are far-far from even approaching that elemental condition. The fact is that near double-digit unemployment has resulted from numerous business models that are now broken: autos, home construction, commercial real estate development, finance, and retail sales. Construction of a new Humpty Dumpty capitalistic “oeuf” will be a herculean task.

Potion hunters, however, should also understand the following macro concept that will dominate the indefinite future, one which I will humbly try to explain in the next few pages in 500 words or less: Reflating nominal GDP by inflating asset prices is the fundamental, yet infrequently acknowledged, goal of policymakers. If they can do that, then employment and economic stability may ultimately follow.

To explain:
A country’s GDP or Gross Domestic Product is really just an annual total of the goods and services that have been produced by its existing stock of investment (capital in the form of plant, equipment, software and certain intangibles) and labor (people working). Over the last 15 years or so in the U.S. that annual production (GDP) has increased in nominal (real growth and inflation) terms of 5-7% as shown in Chart 1. Not every year, certainly not in boom or recessionary years, but pretty steadily over longer timeframes, and consistently enough to signal to capitalists that 5% was the number they could count on to justify employment hiring, investment spending plans, and which would serve as well as a close proxy for the return on capital that they should expect. Nominal GDP is in fact a decent proxy for a national economy’s return on capital. If each and every year we grew by 5%, then that would be sort of like a stock whose earnings grew by the same amount. Companies and investors then would be able to estimate the present value of those cash flows, and price investment and related assets accordingly – a capital asset pricing model or CAPM based on nominal GDP expectations.

While objectively hard to prove, logic dictates that that is exactly what has happened over the past several decades. Businesses expanded with a developing certainty that demand, expenses, and return on the economy’s capital would mimic this 5% consistency. Debt was issued with yields that reflected the ability to service those payments through 5% growth in both real and inflationary terms, and stocks were issued and priced as well with the same foundation. Pension obligations and similar liabilities were legitimized on comparable logic, as were government spending programs forecasting tax revenues and benefits. Both real economy and financial markets then, were geared to and, in fact, mesmerized by this 5%, GDP/CAPM, “model.”

Now, however, things have changed, and it is apparent that there is massive overcapacity in the U.S. and indeed the global economy. As reflexive delevering has unveiled the ugly stepsister of the “great 5% moderation,” nominal GDP has not only sunk below 5%, but turned at least temporarily negative. If allowed to continue – and this is my critical point – a portion of the U.S. production capacity and labor market will have to be permanently laid off. Nominal GDP has to grow close to 5% in order for the economy’s long-term balance to be maintained. Otherwise, employment levels become unsustainable, retail shopping centers unserviceable, automobile production facilities unprofitable, and the economy itself heads towards a new normal where unemployment averages 8 instead of 5%, housing starts total 1.5 instead of 2 million, and domestic auto sales 12, instead of 16 million annual units. Critically in the readjustment process, debts are haircutted via corporate defaults and home foreclosures, and equity P/Es are cut based upon increased risk and substantially lower growth expectations. A virtuous circle of expansion turns into a vicious cycle of recession or low-growth stagnation. Label it what you will, but a modern capitalistic economy based on levered financing and asset appreciation cannot thrive if its “return on capital” or nominal GDP suffers such a significant shock.

Policymakers/government to the rescue –we hope. 0% interest rates, quantitative easing, $1.5 trillion deficits, trillions more in FDIC or explicit government guarantees, a trillion plus in MBS and Treasury bond purchases, TALF, TARP – I could, but I need not go on. Can they do it? In other words, can they successfully reflate to 5% nominal GDP and recreate an “old” normal economy? Not likely. The substitution of government-backed vs. private-leverage is one strong argument against the possibility. Despite the attractive financing rates incorporated with the TALF, TLGP and other government-subsidized financing programs, they come with quality constraints (larger collateral haircuts and mortgage down payments, to name a few) that inhibit the “new normal” lenders from approaching the standards of the 5% nominal-based shadow banking system. Just last week, President Obama proposed new “transaction fees” for “far out transactions” undertaken by financial companies. “If you guys want to do them,” he said, “put something into the kitty.” In turn, there are internal Washington Beltway/external Main Street USA, politically imposed limits which will thwart policy expansion beyond the current stasis. Most of the politicos and even ordinary citizens are screaming for limits on monetary/fiscal expansion: “No TARP II! 1.5 trillion dollar deficits are enough! The Fed must have an exit plan!” etc. If there are such future political constraints or caps (both domestically and from abroad), then one should recognize that most of the ammunition has been spent stabilizing the financial system, and very little directed towards the real economy in terms of job loss prevention. Where is the political will or wallet now to grant corporate tax breaks for private sector job creation or to even hire new government workers, aside from a minor positive push with military enlistment? In brief, the “new normal” nominal GDP, the future return on our stock of labor and capital investment, will likely be centered closer to 3%, for at least a few years once a recovery is in place beginning in this year’s second half. Diminished capitalistic risk taking and constrained policymaker releveraging will lead to that likely conclusion.

Investment conclusions? A 3% nominal GDP “new normal” means lower profit growth, permanently higher unemployment, capped consumer spending growth rates and an increasing involvement of the government sector, which substantially changes the character of the American capitalistic model. High risk bonds, commercial real estate, and even lower quality municipal bonds may suffer more than cyclical defaults if not government supported. Stock P/Es will rest at lower historical norms, and higher stock prices will ultimately depend on tangible earnings growth in the form of increased dividends, not green shoots hope. An investor should remember that a journey to 3% nominal GDP means default/haircuts for assets on the upper end of the risk spectrum, as well as extremely low yielding returns for government and government-guaranteed assets at the bottom end. There is no investment potion for this new environment other than steady income-producing bond and equity investments in companies with strong balance sheets and high dividend yields, as well as selectively chosen emerging market commitments where nominal GDP growth prospects are tilted upward as opposed to gravitating to new lower norms. Madame Rue has met her match.

William H. Gross
Managing Director

"


Alternatively, you can try downloading the .pdf here while the link lasts. And if you missed his July Investment Outlook, we touched on that in one of our recent hedge fund/market guru news summaries.