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Old 06-18-2014, 07:43 AM   #21
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Originally Posted by ejman View Post
I have to imagine that demand destruction would limit prices to a good deal lower than that. But if it happened, I have a truck load of oil and gas equities, so bring it on.

"There are three kinds of men. The one that learns by reading. The few who learn by observation. The rest have to pee on the electric fence for themselves."

- Will Rogers
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Old 06-20-2014, 08:29 AM   #22
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An article in Bloomberg brought this thread to mind. Pimco’s Gross Wagering on Low Volatility in ‘New Neutral’ - Bloomberg Specifically,
Bill Gross is applying Pacific Investment Management Co.s theory of the new neutral beyond bonds, wagering that volatility across markets will remain abnormally low.
We sell insurance, basically, against price movements, Gross, chief investment officer of Pimco, said in an interview yesterday in Chicago at Morningstar Inc.s Investment Conference. At Pimco, thats what weve tried in the last four or five weeks.
PIMCO has been forecasting low returns and slow growth for some time. What is new is the low volatility. Two thoughts come to mind.

- In a low returns environment it is critical to have low expenses. PIMCO fees are high, as are many other actively managed funds. Fund managers may now taking on more risk to goose returns, and this may not be evident to investors.

- I recall an interview of Peter Bernstein by Consuelo Mack (Oct 21, 2005). The snippet is below, but his point is highlighted at the end.

CONSUELO MACK: What do you see is the biggest risks in the financial climate today?
PETER BERNSTEIN: There are always a lot.
PETER BERNSTEIN: There are always a lot, so just talk about the biggest ones. I think it's the level of debt. In terms of American business, debt is low, and they're in very good financial shape. But households, as we know, are very heavily in debt, and the United States government is very heavily in debt, and in debt to foreigners to an increasing degree, which is a serious problem. It means that we're continuously going to have to produce just to service that debt. The problem with debt is that if something goes wrong in the economy, the debt -- it's like a stiff crust, and if you break it, the whole thing can crumble. Now, this is not a forecast. But you asked me, what are the biggest risks, I think this is where the real risks lie.
CONSUELO MACK: So how do you plan, as a money manager and as an investor, to protect yourself against that risk, that very serious outcome, if in fact, the crust breaks and all hell breaks loose?
PETER BERNSTEIN: Suppose I bet that's going to happen, and make a big bet on it, and Im wrong.
PETER BERNSTEIN: It could be very costly. But it has to be part of your -- of the structure of your decision making. I think there's a time when you have a kernel of securities based on optimistic expectations. By and large, the most awful things don't happen, and then some investments on the outside to cover those extreme outcomes. This is kind of the structure that you use. I don't think you make disaster the core of your investing because if you -- that's a very expensive decision to make if you're wrong.
CONSUELO MACK: Now, you've been an early proponent of the theory that stocks and bonds -- stocks, especially, I think -- are going to deliver low returns. After the terrific returns we saw in the 80s and 90s that essentially we're talking about lower returns going forward. How low, and why do you feel that way?
PETER BERNSTEIN: How low? Who knows? Just not high. One thing bothers me about this view, that there's very little opposition to it.
CONSUELO MACK: And it's not going to be with our other two guests either.
PETER BERNSTEIN: And that's dangerous. But it's very hard to make the case that returns will be, say, after inflation, more than 6% to 7%. That's the most optimistic expectation. We start from a point where we've had a very -- a huge bull market in the 1990s, only part of which has been given back. Equities are still valued at historically high prices. Interest rates, I don't have to tell you, are historically low. And so you start from there, and there you are. I think something very important to think about this, that a period of low returns, you think, well, every year maybe we'll have 4%, 5%. It doesn't work that way. Low returns result from high volatility. You have a big year, and then a bad year, and the pattern of low return periods is high volatility, not low volatility. It's a scary time.
PIMCO forecasts low growth, low returns and low volatility. They are saying "this time is different". Those are scary words.

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Old 06-20-2014, 12:21 PM   #23
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Many are forecasting 5% or so equity growth. Problem is what is the sequence? Some of the infinite possibilities for the next 3 years:

1) 5%, 5%, 5%
2) 10%, 10%, -4%
3) 20%, 20%, -20%

Pick your poison.

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