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 Bill Gross
Investing’s a circus you know. Messrs. Barnum & Bailey probably wouldn’t have had a clue as to what I’m talking about but the metaphor is more than apt. Every big top, you see, has a ringmaster who blows his whistle to begin or end the show (Greenspan), as well as its share of ferocious carnivores (portfolio managers). Then there’re the jugglers (traders), clowns (those that buy at tops and sell at bottoms), and the inevitable entourage of elephants holding each other’s tails (PIMCO’s surely one of those, although it’s hopefully the lead pachyderm – tail holding’s a pretty stinky job). But during our three-day Secular Forum held in early May, PIMCO’s 100+ professionals from around the globe took this circus metaphor to the very top of the tent. “Cast your eyes ladies and gentleman up to the high wire more than 100 feet above the center ring. The death defying global economy will astound you by walking the wire between ice (deflation) and fire (inflation). It’ll rebalance itself over the next 3-5 years before your very eyes, tiptoeing from a U.S.-centric global economy to one including Euroland, China, and its Asian neighbors. Truly the Greatest Show On Earth!”
Well…ringmasters (and Fed Chairmen) can be great salesmen at times. The art of hyperbole is a requirement of the job. Our Secular Forum participants, with perhaps a slightly more down to earth view, would readily concede that investing’s a circus and even that the global economy is successfully walking a high wire, for now. We’re just not as confident of the health of our global economic walker’s inner ear – call it his sense of balance – and whether he might not tip first in one direction (fire/inflation) and then another (ice/deflation) and eventually crash to the ground. Read on, dear reader – let the circus begin.
Historical Secular Review
Last year’s Secular show, if you’ll recall, was dominated by a sense of a global economy in recovery due to near historic amounts of fiscal and monetary stimulation. We alluded to our 3-5 year outlook, however, as a “wet log” fire, recognizing the potency of 1% interest rates and $500 billion deficits in the U.S., but insisting nonetheless that in the out years – 2006 and 2007 – that the world’s economy would revert to a simmering (not smoldering) relic of its former self as the stimulus wore off and the primary macroeconomic problem returned: a lack of aggregate demand and too much supply. Because of globalization and Chinese overproduction; because of private debt levels and their eventual suffocating impact on personal spending; because of a creeping almost imperceptible demographic muting of consumption in aging societies such as Japan, Germany, and Italy; because of market bubble popping; and because of post 9/11 syndrome and other terror related influences, we felt we were living in a world where we had too much relative to what we can afford to or want to spend. Slow growth would dominate. Inflation would be contained.
Rest of the article.
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