Sunday, May 20, 2007

PIMCO's Bill Gross changes his tune, finally, with a nod to Greenspan

I enjoy reading the monthly Investment Outlook (IO) newsletters written by PIMCO's "Bond King", Bill Gross. I don't agree with much of what he writes, but at least it is stimulating food for thought. In general, he takes a cynical and bearish view of the U.S. economy and stock market. Unexpectedly, his newletter this month (May/June) has a radically different tone. It is entitled "How We Learned to Stop Worrying (so much) and Love 'Da Bomb'". He starts with a mea culpa and admits that his outlook and decisions led to investments in which "those positions cost us some basis points." This doesn't mean he has had a complete change of heart, saying that "We didn't really vow to stop worrying – just to worry less – and to look at 'da bomb' from a different perspective and ask if there was a lotta love there."

He defines 'Da Bomb' as having four critical components: 1) globalization, 2) technology, 3) freer markets/financial innovation, and 4) favorable public policy, and notes that "all of these ingredients have combined to produce the dynamic trends displayed in our four mini-charts below: accelerating global growth; disinflation; increasing returns on equity capital; and low real interest rates."

So, why the sudden change of heart after all these years? Well, there is a hint deeper in the newsletter: "Importantly, special consultant to PIMCO Alan Greenspan has pointed out that the process of transitioning hundreds of millions of workers from planned economies to a market environment may peak in the next 2-3 years in terms of its rate of growth, reducing the disinflationary impact." Ah, that explains it. We have seen press reports about former Fed chairman Greenspan agreeing to work with PIMCO, and here we see the first fruit of that collaboration. Good work, Alan.

-- Jack Krupansky


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