1 - Our New Realities panel discussion on Tuesday was loaded with meaty content. Between the insights of the panelists and the probing questions of the attendees, there was a lot to think about. Erik Olsen is preparing a video synopsis; we will include it in next week's newsletter.
2 - On Thursday I took part in a conference call with Mohammed El Arian and Bill Gross of PIMCO. As an indication of the respect the investment world has for these two, the call included participants on four continents. My semi-raw notes from the call are assembled in an article below:
Andy's Notes from PIMCO conference call, 1/19/2012:
Participants from North America, South America, Europe and Asia.
Mohammed El Arian discusses microeconomic conditions:
Global markets and economies are seeing a morphing of expectations. Flatter bell curve with fatter tails - both on the positive and negative sides.
Europe: The very construct of the eurozone is in play. It's hard to see a repeat of 2011 - this should be a make-or-break year for the eurozone. Need to bring Italy and Spain from the brink. It is a bi-modal recovery: at end of 2012, will have tipped to the left or right tail - either very good or very bad. Europe has great relevance for investors in the US.
US: Encouraging data recently. Evidence of an ongoing healing process. Will it accelerate? There are four primary drivers:
1 - Increase in household savings rate.
2 - Scope for further policy changes is limited to the federal reserve. Over time, the effectiveness of additional measures reduces.
3 - Headwinds from Europe.
4 - Political and social dimensions hinder policy activism out of DC.
Emerging markets: Much better economic conditions, but structurally still catching up.
We are comfortable with the traditional bell-shaped curve - tails are low-probability - this curve guides investors' traditional risk approach. We are moving INTO a bimodal distribution: flatter curve with fatter tails - and need to prepare more fully for both tails. Used two-humped camel (Bactrian, in Mongolia) as an illustration.
Gross discusses investment strategy:
Does not believe success can be found with a little bit of this and a little bit of that, or going to cash and sitting out the year. Must approach with a recognition that the two fat tails would occur in different time periods. Left tail (bad) involves credit destruction, right tail (good) involves successful reflation and economic growth. Left tail would/should come fairly soon (6 mos) while right would be farther out. Try to anticipate policymakers' policies and watch for negative repercussions.
Trillions of $ of checks have been written by the ECB, Bank of England, Operation TWIST, Bank of Japan - everybody's writing checks. Checks are flowing through into financial markets. This reflects "financial repression:" extremely low interest rates and very low real rates for an extended period of time. It represents an effort to prevent the left tail. It is like picking pockets of investors and savers, allowing economies to maintain low rates.
This financial repression could go on for 5 - 10 years, could lead to a left tail. Must anticipate this and invest accordingly. If they're going to write checks, we want them to write them to us. Try to "pick the clean dirty shirts." Greece has the dirtiest shirt around, the US has one of the cleaner dirty shirts - also Canada, UK, and Germany. Go out longer on the yield spectrum by purchasing intermediate-duration securities. Focus on a duration strategy - which is counterintuitive - by going farther out in a environment of low rates. Intermediate, NOT long (10 years and out). Long bonds should be TIPS.
Left tail could occur if the central banks' policies do not succeed. In that case, you don't want a lot of credit. Reduce credit exposure, especially those that are levered to the system, such as banks and financial companies.
Stocks, commodities and currencies: stocks yield more than bonds right now; that's good. A normal distribution to stocks is called for: steady cash flow, highly certain dividends. Commodities: also could go either way. Focus on scarcity and geopolitical considerations. Currencies: the dollar is king in left-tail world; a right-tail world would be dollar-unfriendly. Be careful in terms of any high-percentage weighting in either direction.
Q: Implications of a possible default in Greece? A: Depends on whether it is orderly or disorderly. Disorderly would affect our strategy. Orderly: risk-on; disorderly: risk-off.
Q: What about the US? A: There is less liquidity in the system than there has been, and some that is in the system is slanted toward official (government and bank) channels. Too few people manage their risks properly, so when things shift, investors jump to change asset allocation. Make sure you can navigate this volatility - the last thing you want is to be forced into a move at the wrong time.
3 - Attention all lady clients: Please be our guest at a special Valentine's Day Ladies' Tea to be held on Tuesday, February 14 at 3:00pm in the Depot Room. We love being able to show our appreciation to our clients, and the Depot Room setting is the ideal place. Michele and Juliet are still finalizing the plans, so mark your calendar for Valentine's Day at 3:00.
4 - TD Ameritrade recently issued a client statement describing the various levels of protection they use for client accounts. If you'd like to read it, click here to download it.
Have an awesome week!