2009 Morningstar Investment Conference – 4

Bill Gross from PIMCO was the keynote speaker at lunch.  He had a lot to say, but before I get to that (and before I forget to mention this – here is a link to the conference twitter feed, which some of you may find interesting.  By the way, is there any interest out there in a twitter feed for ModernGraham?).

Anyway, Bill Gross was the keynote speaker at lunch.  Mr. Gross is a founder, managing director, and co-chief investment officer of PIMCO.  He manages quite a bit of money, so it was interesting to hear what he had to say.  He went into depth about what PIMCO considers the “new normal” economic environment and I’ll try to summarize what he said.

First, he talked about where the economy has been the last 25-30 years or so.  Essentially it all started with the taking off of the gold standard by Nixon.  That led to greater financial innovation as central banks were free to print money without being tied down.  From there, New York City became the financial capital of the world as markets across the globe began to turn to the United States to see how a capitalistic economy should work.

We then created a world where there was an emphasis on the asset side of the balance sheet instead of the liability side (I wonder how Graham would feel today).  We had complicated compensation plans based on bonuses, incentives, etc. instead of the old-fashioned salary. 

All that eventually led to a “shop til we drop” consumerism culture.  If a crisis came along (and some did), the central banks just came in to the rescue and let things keep going the way they were. 

Then things started to build up further.  The Dot Com crash happened.  Then the housing market started to inflate and all of a sudden exploded.  We had “shadow banking” where we didn’t know what assets were.  Overall there was a great maldistribution of wealth and global trade.  The investor class gained while the labor class kind of stayed where they were. 

Today we are in the midst of a Great Recession (it seems to me that this term is sticking).  Things have finally snapped.  It all came down when everybody came to believe that nothing could possibly go wrong.  Currently we are experiencing a releveraging from the private sector to the public sector.

That’s all in the past (or present as the case may be).  According to Gross and PIMCO, the future will include slower, subdued growth in GDP of likely 1-2% over the long-term, there will be a higher rate of natural unemployment of 7-8%, and there will be accelerated inflation in the latter part of the next 3-5 years.

So the question is what do you do in the “new normal”?  Gross provided 7 thoughts:

  1. The “Policy Portfolio is dead. Yale too” – In the past, you could get away with doing a 60/40 asset allocation or something similar depending on your risk level.  You could assume that stocks will always outperform bonds.  According to Gross, that is no longer true.
  2. “Get used to your 301k” – Your 401k may never return to the levels you saw in October 2007.  Get used to it and move on.
  3. “Stable Income” – You should put your money in stable income investments.  That could range from companies that pay a stable dividend or have stable earnings to looking at bonds in a new light. 
  4. “Shake hands with the government but beware of burden sharing” – The government is a major player in the new normal and you should be doing business with them but be careful as you may be asked to take on a share of the load.
  5. “One day – maybe sooner than we think – the dollar will lose reserve currency status” – The dollar may become weaker to a point where you need to put your money elsewhere when you want to just have a reserve fund.
  6. “Invest in BIC’s and their surrogates” – Brazil, India and China are great potential investments because their economies do not have the level of consumer spending that the US has.  There is a great potential for growth.
  7. “Investment Banks and managers will make less money” – Fees will have to go down as the returns go down a bit.

That was it.  Like I said, there was a lot said during that lunch session that was interesting.  I agree with some of it, and disagree with some.  I’ll try and give my opinions in a post next week.

More of our coverage of the 2009 Morningstar Investment Conference:
Thursday opening session
Three Takes on Value breakout session
Two Sides of the Coin breakout session
Thursday general session with John Bogle


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