Can You Imagine?

iStock_000011119461XSmall - elderly concernSometimes after lunch before getting back into the swing, I ask myself such though provoking questions as:

  • • If I could go back to college for just two weeks with all my current resources and my smarts, what would the weekends be like?
  • • If I won the Powerball like Pedro Quezada, what’s the first thing I’d buy?
  • • Would I rather be Hugh Hefner or Tom Brady?
  • • If the President and the Government would get out of our way, just think how our economy would be booming?

Recently, I sat down with an analyst with PIMCO and asked him that very same last question. I figured he was very busy and didn’t have time for the first three. I explained to him that we like most portfolio managers worth their salt had prepared portfolios for some form of political Armageddon in post-Election 2012 with the fiscal cliff and sequestration imminent. His response…. “Can you imagine?”

He said he had just completed their quarterly PIMCO quarterly meeting that brings together all of their analysts and portfolio managers headlined by their key contributors, Bill Gross (co-founder of PIMCO and manager of their $270B Total Return Fund) and Mohammed A. El-Erian (CEO of PIMCO and contributor on nearly every financial show on Earth). The gist of this meeting is always first the macro global outlooks and then micro events driving current bond trends.

Without boring you with the minutiae that we sift through daily, I can break the meeting down into a few areas:

Europe:

We all fell asleep in 2012 worrying about “cliffs” and “sequestration” and Europe got a free pass from our markets, but all it takes is a pimple on a rhino’s butt like Cyprus to remind us that bail-outs are still alive and well in Southern Europe. In fact, Austerity isn’t working and citizens are revolting against it. The impact of this resistance is even being felt by the most austere of austere….the Germans. They will look for the ECB to begin their own Quantitative Easing (QE) and believe rates will begin to drop. They actually will begin to follow the US Treasury’s model of bond purchases. Can you imagine what would have happened if they had begun this program sooner? How much of Europe’s current recession could have been avoided?

2013 Outlook: Recession

Japan:

After decades of no growth, the Japanese government has silently begun their own stimulus program which has begun to create the liquidity needed for their economy; however, this has damaged the Yen they so steadfastly supported. PIMCO believes, signs of economic life are finally on the horizon. Can you imagine how much growth has been squandered over the last 20 years by Japan’s government’s stubbornness?

2013 Outlook: 1.5-2% Growth

China:

The Chinese rural peasantry to middle-class movement has stalled. Apartments stand unoccupied and jobs uncreated. Savings rates hover at 40% and the there’s little consumption by the peasant poor. The government lies about inflation so they’ll lie about GDP. Hell, they lie about their average rainfall in Chengdu in June.

2013 Outlook: 7.5%

US:

The old adage is, “You can’t fight the Fed.” It seems the world is learning that is a script they should be following as QE is either in play or will be. This liquidity in the US has created stimulus that has artificially lowered interest rates forcing money from fixed income investments into equities. It also has finally allowed the real estate market to reboot.

PIMCO expects a 5-10% rise in housing pricing in 2013 with inventories shrinking. Jobs are being created in that sector, albeit slowly. They also expect the auto industry to continue their boom. The average car on the road is 11 years old which will benefit new car sales and also companies that do financing in this area. They also expect the US to be energy independent by 2025 because of advances made in and the uncovering of our huge supplies of liquid natural gas in North America.

2013 Outlook: 1.5-2% GDP

Can you imagine what the GDP growth would be if we had a President and a Congress that were pro US growth versus pro partisan victory at any cost? Corporations wouldn't worry about what it is going to cost to hire an employee because of regulation and insurance. Small companies wouldn't worry about using some of the capital they have set aside for emergencies to expand or buy new equipment.

While the wildcards of the Middle East and a crazed little North Korean whose best friend is Dennis Rodman exist, we think political tumult, the biggest roadblock to equities, has been reduced substantially. We have made changed in our clients’ portfolios since January to reflect our thinking on these risks. We see smaller pullbacks ahead, but liquidity from the Fed continuing to win out for the markets for 2013.

Source: Meeting held March 27, 2013 with Ryan Keating, ETF Sales Specialist/Global Wealth Management with PIMCO Investments.

• There is no assurance that the stated 2013 Outlook numbers will be achieved. Investing involves risks including possible loss of principal

• The opinions voiced in this material are for general information only and are not intended to prove specific advice or recommendations for any individual. To determine which investments(s) may be appropriate for you, consult your financial advisor prior to investing. Securities provided through LPL Financial. Member FINRA/SIPC. • The economic forecasts set forth in the blog may not develop as predicted and there can be no guarantee that strategies promoted will be successful. • PIMCO, HMC Partners, and LPL Financial are not affiliated with one another.