January 11, 2013
By Steve Blumenthal
Over promised! Under funded! Unmanageable debt! Keep on printing boys! Checks for Free!
In this week’s piece, I share a link to “Money for Nothin’ Writing Checks for Free” by Bill Gross. Bill does a great job in simplifying and sharing his views on what just might lie ahead.
Bill Gross – “Money for Nothin’ Writing Checks for Free”:
- “Like gold,” Bernanke said in his famous “helicopter speech” in 2002, “U.S. dollars have value only to the extent that they are strictly limited in supply. But the U.S. government has a technology, called a printing press that allows it to produce as many U.S. dollars as it wishes at essentially no cost.” No cost? Right.
- The world’s six largest central banks have collectively issued six trillion dollars worth of checks (currency units used to buy government bonds) since the beginning of 2009 in order to stem private sector delivering.
- Yet there is most certainly a cost. “Ultimately government financing schemes such as today’s QEs or England’s early 1700s South Sea Bubble end badly.”
- Read the full article here.
PIMCO – here are some quick highlights I note from PIMCO’s forward economic outlook:
- Headline inflation should be in the range of 1.8% to 2.3% in 2013, which is well within the Fed’s newly articulated range of tolerance. While our base case currently isn’t for runaway inflation, we believe over time the risk of higher inflation is greater than the risk of lower inflation. That is an important consideration for investors.
- We expect U.S. growth in the range of 1.25% to 1.75% over the cyclical horizon.
- The main risk to economic growth is fiscal policy.
- The government spending and subsidies that have bolstered growth since the economic crisis began have run their course, and the fiscal authorities can no longer be counted on to contribute positively to the economy. Over time, fiscal contraction could pose considerable downside risk to economic growth.
- While the developing situation in Europe has turned more favorable over the last six months, particularly from a market perspective, slower growth in Europe continues to factor into the global growth outlook.
- The likelihood of a short-term breakup in Europe or a disruption to the global financial system appears noticeably lower now than it did at the end of 2011.
- The Fed has effectively reduced the likelihood of a deflationary spiral in the U.S. economy. However, other risk factors have intensified this year.
- Specifically, what was previously a longer-term issue of fiscal unsustainability in the U.S. has become a very near-term concern for the growth outlook – with a cliff to prove it.
- We believe investors should take a more defensive approach to risk in 2013.
- Federal Reserve support will continue, but its future effectiveness must be called into question.
- Housing will be a bright spot in the year ahead, but on its own cannot lift the entire economy, or even fill the hole created by fiscal drag.
- We believe that investors should consider reducing risk, concentrating Treasury holdings in the intermediate (five- to ten-year) part of the yield curve where direct Fed policy support will have the most impact, and rotating away from nominal assets to real assets, such as Treasury Inflation Protected Securities, commodities and real estate.
- I tend to agree with the low growth outlook and believe that recession is likely in 2013 with significant inflation risks following in 2014/2015. Here is the link to PIMCO’s outlook piece.
Trade Signals:
- I continue to favor a focus on actively hedging long equity stock exposure and targeting that exposure tied to periods of RISK OFF and removing hedges tied to periods of RISK ON. I favor using periods of extreme sentiment to guide RISK ON and RISK OFF. In this week’s Trade Signals, you’ll note that my two favorite sentiment charts are nearing a bullish sentiment extreme. Get ready to establish hedges.
- Here is the link to Wednesday’s investor sentiment charts and short commentary on the current “Risk On” trade.
With warm regards,
Steve
Stephen B. Blumenthal
Founder & CEO
CMG Capital Management Group, Inc.
steve@cmgwealth.com
610-989-9090 Phone
PS: When I look at the world, I try my best to view it from a probability perspective. I read endlessly and have access to some outstanding hedge fund and independent investment research. Fortunately, if you dig deep enough, you have access to a great deal of information on the internet. This certainly wasn’t the way it was in 1984 when I started in the business.
I believe we are in a challenging low return environment and that most individual investors hold higher return expectations; those expectations will not be met and investors will seek a better solution. I see an unprecedented opportunity for you to grow your advisory business.
With this piece I try to share some information that I have found to be important. To me the evidence is clear, but I most certainly could be wrong.
Whether I am correct or incorrect in my thinking, my overriding belief is that you can create and manage successful portfolios for the period ahead. This environment requires more work (mixing a diverse set of risk drivers and more active beta hedging) than exists in a secular bull market cycle, but also offers you the ability to separate yourself from the 98+% of your competition that is heavily weighted in the old 60/40 stock/bond construction model.
The good news is that the investment opportunity has been greatly expanded and solutions exist. While risk is an inescapable companion in the investment process, I believe it can be quantified and minimized by expanding the asset classes you include in your portfolios.
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